Form 1099-R not filed for deemed loan

[DDB BN]

We took over a plan that had brokerage accounts, each participant had an individual brokerage account for deferral and SHM contributions and there was a pooled account for PS contributions.  The participant loans were taken out of the participant's balance in the pooled ps account and the repayments were also made to the pooled account.  We have since transitioned the plan to the John Hancock recordkeeper platform.  Off calendar year plan end is 02/28.  It has been brought to our attention that 2 participants with loans terminated, one in 2017 and the other in 2018.  The deemed loans had not been removed from plan assets on the 5500 filings, should we amend prior year returns or report on the filing for 02/28/19 year end?  Since the 1099-R was never prepared for these terminated participants (one has not been paid out yet and the other has received a partial distribution and will receive the remainder of her balance in the next week.), how should we proceed regarding the non-issue of the 1099-R for the appropriate years?

[Lou S.]

When did the cure period end and they go into default?

1099-Rs should be prepared and sent for those tax years, late at this point, if for 2017 or 2018. And participant may have to file amended tax returns if they didn't claim the income.

If the payments stopped late in 2018 on the second loan it's possible the default occurred in 2019 in which case you are fine on that one if you send the 1099-R in January 2020.

[DDB BN]

We just took this plan over FYE 02/28/19.  It appears that the cure period for the participant terminated in 2017 ended in 2017 and the same for the participant who terminated in 2018.  1099-R was filed for those years but did not include the loan defaults.  Should we file amended 1099-r for each year?  Do not know if the terminated participants included the defaulted loan on their tax returns.  They were notified on the distribution paperwork that the loan was in default and was to be reported as taxable income.

[Bird]

I can pretty much guarantee the participants did not include the defaulted loans on their tax returns!

Look, this is messy and issuing prior year 1099s causes a lot of grief for everyone.  Let me put it this way - I have allowed sponsors to tell us to issue a 1099-R in such a situation for the current year, with added interest to the year of reporting.  It's not right but on audit, the participant would have decent shot at a "no harm/no foul" defense - they wind up paying a little more due to the additional interest, and if you wind it back and forth between the years as to what should have been done and what was done, it's close to a wash.

[Kevin C]

2 hours ago, Bird said:

I can pretty much guarantee the participants did not include the defaulted loans on their tax returns!

Look, this is messy and issuing prior year 1099s causes a lot of grief for everyone.  Let me put it this way - I have allowed sponsors to tell us to issue a 1099-R in such a situation for the current year, with added interest to the year of reporting.  It's not right but on audit, the participant would have decent shot at a "no harm/no foul" defense - they wind up paying a little more due to the additional interest, and if you wind it back and forth between the years as to what should have been done and what was done, it's close to a wash.

Isn't that what Rev. Proc. 2019-19 Section 6.07(2) says you can do?

Quote

(2) Plan loan failures treated as deemed distributions under § 72(p). Unless correction is made in accordance with section 6.07(3) (to the extent applicable), a deemed distribution under § 72(p)(1) in connection with a failure relating to a plan loan to a participant must be reported on Form 1099-R with respect to the affected participant, and any applicable income tax withholding amount that was required to be paid in connection with the failure (see § 1.72(p)-1, Q&A-15) must be paid by the employer. In this case, the deemed distribution may be reported on Form 1099-R with respect to the affected participant for the year of correction (instead of the year of the failure).

 

[DDB BN]

Thank you to all.